ECB May Fund Bailouts Through Loans to IMF

A proposal that the International Monetary Fund could call on the European Central Bank to lend it money to finance bailouts is gaining traction, and if all parties agree, could be announced at the next European Union summit on December 9.

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“Germany and the ECB are still opposed to the idea but with no other viable alternatives talks could start soon. There is urgency in this as something must be in place if Italy needs a bailout,” a senior euro-zone government official said.

The only other proposal under consideration is having the ECB directly finance the euro-zone’s bailout mechanism — the European Financial Stability Facility — an idea Germany has repeatedly made clear it will not support. “It’s the French proposal to turn the EFSF into a bank so it can lend to countries in trouble. But it’s going nowhere,” said an IMF official.

The IMF has contributed roughly a third of the total sum of existing euro-zone bailout programs, depending on the time frame, while the EU and the ECB contributed the rest.

Future euro-zone bailouts are to be funded by the EFSF, which currently has a capacity of 440 billion euros. However, after the planned 250 billion-euro bailout planned for Greece, Portugal, and Ireland, there wouldn’t be enough left should Italy require a bailout as well.

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The ECB has been buying bonds of at-risk countries in order to keep down borrowing costs, but has repeatedly said the measure is only temporary. Economists have said using the ECB’s limitless resources may be the only way to finance measures needed to get Europe’s debt crisis under control.